Your Biggest Retirement Regret May Have Nothing to Do With Running Out of Money

When people think about retirement regrets, they usually point to blunders like filing for Social Security too early, investing too conservatively, or not planning well enough for healthcare expenses. And of course running out of money is a huge pain point for retirees who eventually face that consequence.

But your biggest retirement regret may have nothing to do with running out of money. Rather, you may eventually regret spending too little during retirement when you can easily afford to spend more.

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The psychology of cautious spending

There's a reason people who retire with large IRAs or 401(k)s tend to have a hard time spending their money. It can be difficult to undo decades of a "must save" mentality.

A lot of people spend their working years pushing themselves to accumulate as much retirement savings as possible. To get there, they often live well below their means and adopt frugal habits.

That's not a bad thing. But it can become a bad thing when a savings mentality makes it difficult to spend appropriately during retirement.

Let's imagine you earned a fairly modest income during your working years but through hard work and savvy investing, you've managed to retire with a $2 million IRA. That's an impressive feat, and it should give you the green light to spend your money in a controlled but comfortable manner.

Instead, what might happen is that every time you gear up to take an IRA withdrawal, your brain sends off a warning that you're doing the wrong thing. Rather than view your nest egg as money that's meant to be spent at this stage of life, you might see it as money you need to preserve at all costs.

That, frankly, could lead you to underspend during retirement. And while that may result in a nice inheritance for your heirs, you might regret not enjoying the money you worked so hard to accumulate.

How to feel more comfortable using your retirement savings

Of course, it's easy to see why so many retirees struggle to spend their money. There's no way for anyone to predict their own life expectancy, so it's hard to know how long that money needs to last.

Market volatility doesn't help things, either. It's hard to tap a nest egg for income when the next downturn could be right around the corner.

But one thing you don't want to do is reach the end of your life feeling like you never got to do the things you wanted with the money you worked hard to save. So it's important to try to change your mindset and remind yourself that your saving years are over, and now, it's time to enjoy your nest egg.

That doesn't mean you should tap your IRA or 401(k) without a plan. But the right plan could help you feel more comfortable with the idea of finally becoming a spender.

First, establish a withdrawal rate that's appropriate for your investment mix. If your portfolio has a fairly equal split of stocks and bonds, something in the vicinity of 4% might work for you. If you'd rather be more conservative and limit yourself to 3%, that's not necessarily a terrible thing, as it gives you a floor to work with.

Next, build yourself a cash buffer. Market losses could put you at risk of running out of money. But if you don't have to sell off investments when they're down, you mitigate that risk significantly. Having two to three years' worth of expenses in cash gives you a nice cushion, allowing you to ride out a market decline and wait for a recovery.

Finally, remind yourself why you saved for retirement. Acknowledging that the money is supposed to help fund travel, leisure activities, and other perks is an important part of the process.

It's natural to have certain financial regrets in the context of retirement. But spending too little is a mistake that's easily solvable. The key is to come up with a withdrawal strategy, safeguard your plan with a nice cash cushion, and retrain your brain to think of your nest egg as a pool of funds that's meant to make your senior years as rewarding as possible.

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